Chapter 40 Chapter 11 Relationship between Marginal Cost and Urban Land Value

Section 1 The impact of location on urban and rural land values.foundation value. The first three chapters examine the relationship between production costs and income from the appropriation of the "prime force" of land and other natural gifts, as well as the relationship between production costs and income directly from private investment.In between there is a third class, which includes those incomes, or rather those parts of incomes, which are the indirect results of the general progress of society, and not the direct results of private capital and labor invested for profit.Now we should study this category, especially with regard to the value of city foundations.

We have already seen that although the remuneration given by nature, calculated in terms of agricultural production, almost always does not increase in proportion to the increase of capital and labor invested in agriculture; As a result of the increase of the agricultural population, the density of population, then, tends in all probability to increase the value of the agricultural produce.We have seen how this effect, when the product is calculated according to its value to the producer, and not according to its quantity, opposes and often exceeds the operation of the law of diminishing returns; A good market for selling agricultural products can also provide him with a good market for necessities. He buys cheap and sells expensive, and the various conveniences and enjoyments of social life are increasingly within his reach.

We have also seen, moreover, how the economies resulting from a high degree of industrial organization often depend only in a small degree on the resources of the individual factories.Those internal economies which each industry has to arrange for itself are often insignificant compared with those external economies produced by the general progress of the industrial environment; and the position of a firm almost always plays a great The effect of changes in the industrial environment on the cost of production is most pronounced on the value of the location of a site due to the increase of the industrious and wealthy inhabitants of the neighbourhood, or the opening of railways and other means of communication to existing markets.

Assume that two producers in any industry (whether agricultural or not) have equal convenience in all respects, but the first firm occupies a more convenient location than the second firm, so that the freight required to buy and sell in the same market less, then the differential advantage his position affords him is equal to the sum of the extra freight paid by his counterpart.We may suppose that other conveniences of location, such as proximity to a labor market in a trade which is especially suited to him, may likewise be converted into monetary values.Converting these into money values ​​and adding them together, we arrive at the money value of the convenience of location which the first enterprise has over the second; Calculated in terms of the value of agricultural land, this value then becomes its special positional value.The extra income which can be obtained on more favorable ground provides a so-called rent of special position; the total ground value of any piece of building land is what it would be worth if sold in the free market after the building had been demolished. "Annual ground value"--to use a convenient, though not quite exact term--is the income that price would provide at the current rate of interest.It obviously exceeds the value of the particular position by only as much as the value of the agricultural land, which is often an almost negligible amount in comparison.

Section 2. Some exceptional cases of place value created through deliberate action by individuals or groups. Obviously, most location values ​​are "public values" (see p. 117 above).But there are some exceptions to be aware of.Sometimes the houses in the whole city or even a district are designed according to commercial principles, and are completed by a single person or company with venture capital.The latter action may be partly due to charitable or religious motives, but in any case its financial basis will be found in the fact that dense population is itself a cause of increased economic efficiency.Normally, the major gains from this efficiency go to those who already occupy the land.But those who are engaged in pioneering a new region or building a new city usually base their chief hopes on commercial success.

For example, when Salter and Pullman decided to move their factories into the country and establish the towns of Salter and Pullman, they both anticipated that the land they could buy at the value of agricultural land would acquire urban estates because The special location value generated by the surrounding population.The same motives have governed those who, having selected a site which would have been suitable for a summer resort, purchased it and developed its resources at great expense.They are willing to wait a long time for any net income from their investment, because their land will end up with a high location value due to the dense population around it.

In all these cases the annual revenue from the land (at any rate, that part which exceeds the agricultural rent) should in many cases be regarded as profit, and not as rent.Whether the land on which the factories of Sarthe or Pullman were built, or the ground of a shop or shop (whose position would make it possible to do business with the factory workers), afforded a "high rent," The above arguments all apply equally.For in such cases great risks must be run; and in enterprises of every kind where there is great risk of loss, there must be the hope of great profit.The normal cost of production of a commodity must include a reward for the kind of risk required to produce it, which is sufficient to make those who hesitate to take the risk consider the net benefit (and also That is, after deducting the amount of losses they may suffer) is the reward for their hard work and expenditure.The advantages afforded by such ventures leave little left but sufficient for this purpose.This can be explained by the fact that they are still not very common.But they are probably more common in industries dominated by powerful corporations.For example, a major railway company could build a Crewe or a New Swindon to manufacture railway equipment without taking any huge risks.

A similar instance would be: A group of landowners united to build a railroad, not expecting that the net revenues from railroading would pay any great interest on the capital invested in building it; but it would greatly increase the value of their land.In this case, a part of the increase in income as landowners should be regarded as the profit of the capital invested in the improvement of their land, although this capital has been used in building railways, and not directly on their own. land. Other examples of the same nature are: major drainage works and other schemes for improving the general condition of agricultural or urban land, if these schemes are carried out at the expense of the landowners, whether by private agreement between them, or Collect special donations from them.In addition, investments such as a country's establishment of its own socio-political organization, popularization of national education and development of natural resources also fall into this category.

It would thus appear that the improvement of circumstances which increases the value of land and other bounties of nature is in many cases due in part to the deliberate investments of landowners to increase the value of land; A part of this may be regarded as profit, if we consider the long run.But in many cases it is not; any increase in the net income afforded by the bounty of nature does not arise from special expenditures by the landowner, nor does it provide an immediate motive for employing such expenditures; should be regarded as ground rent. Situations like the ones above arise when someone who owns dozens of acres on the outskirts of a boomtown "develops" them for building purposes.He may have designed the roads, decided where the houses should be joined together, where they should be separated; and drawn up the general form of building, and perhaps fixed the minimum cost of building each kind of house; for the beauty of each kind of house increases the general value of all houses. .The collective value he thus creates is of the nature of public value; it depends largely on the underlying public value which the whole base derives from the rise of the prosperous city in its neighbourhood.But he foresees that part of the value generated by organizational capabilities and expenditures should be regarded as the reward of the enterprise, and should not be regarded as the private appropriation of public value.

These exceptions must be considered.The general guideline, however, is that the number and nature of dwellings to be built on each lot is generally (subject to local building laws) such that the most favorable outcome can be expected, with little or no regard to its impact on the surrounding area. The role of positional value.In other words, the foundation value of the lot is determined by factors which, for the most part, cannot be influenced by those who decide what houses to build; he adjusts his Construction expenses. Section III Some of the reasons for determining perpetual land rent.

Owners of building land sometimes use their land to build houses and sometimes simply sell it.Most commonly, he leased his land at a fixed rent for a term of ninety-nine years, after which the land and its buildings (which, by deed, had to be properly repaired) passed to his estate.Let us examine those causes which determine the price at which he sells his land, and the rent at which he leases it. The capital reduction value of any piece of land is the bookkeeping discounted value of all the net income it may provide. The so-called pure refers to subtracting various unexpected expenses including rent collection fees on the one hand, and adding its mineral deposits, development The capabilities of various enterprises and those physical, social and aesthetic advantages when used in housing.The monetary equivalent of the kind of social status and other personal satisfaction afforded by land ownership does not appear in the monetary return of the land, but is included in its capital monetary value. Next, we examine what determines the "rent" that a landowner can get for renting out his land (say, for ninety-nine years).The present value of all fixed rents tends to be equal to the current capital value of the land; however, two items must be deducted, one is the obligation to return the land and the buildings on it to the heir of the owner's estate when the lease period ends; the other One is the possible inconvenience caused by any restrictions on the use of the land by the lease.Because of these two discounts, the ground rent is slightly less than the "annual ground value" of the land, if the ground value is supposed to remain constant at all times; At the beginning the rent is generally a little above the annual foundation value, and at the end of the lease it is much lower. Before determining the value of building rights on any given piece of land, the estimated building costs must be subtracted from the estimated gross proceeds of the building. Among these costs are also taxes (central or local) which may be paid to Real estate is expropriated and paid by the real estate owner.But this raises some difficult side issues which have to be left for discussion in Appendix VII. The fourth section discusses the relationship between diminishing returns and building land. Let us reiterate the fact that the law of diminishing returns applies to the use of land for living and working in all industries.Of course, in construction, as in agriculture, too little capital is possible.As a homesteader thinks he can produce more produce by cultivating only half of the one hundred and sixty acres allotted to him than by cultivating the whole of the land, so even when the land is of little value, a house A very low dwelling can be expensive out of proportion to the convenience it provides.In agriculture, an acre of land affords the highest return for a given capital and labor, beyond which additional capital and labor are less rewarded, and so in building.In agriculture the quantity of capital per acre which affords the greatest return varies with the nature of the crop, the state of the art of production, and the nature of the market it supplies.Likewise, in building, the capital per square foot, which may afford the greatest return, if the foundations have no rare value, varies with the use required of the building.But if the foundation has a rarity value, it is worth continuing to use capital beyond this point of maximum reward without paying the additional cost of the land required to expand the foundation.Where the value of the land is high, it costs more than twice as much to make the square foot twice as convenient as it would in the same case where the value of the land is low. We may apply the term architectural margin to that convenience which is only worth taking from some given foundation, and which is not taken from it if the scarcity of the land diminishes.For the sake of conception, we may assume that this facility is provided by the top floors of the building. The savings in land costs achieved by building the top floor rather than enlarging the building with more ground more than compensated for the additional expense and inconvenience of the scheme.The conveniences afforded by the penthouse, less than its occasional inconveniences, are just worth their cost, leaving no surplus for ground-rent.The cost of production of those things manufactured on the attic (as part of a factory, for example) is only offset against their price, leaving no surplus for rent.The production costs of manufactured goods can therefore be regarded as the production costs of commodities manufactured on the building margin, and thus do not pay ground rent.That is to say, ground rent is not included in that group of production costs at the margin where the role of the forces of supply and demand in determining value is most clearly seen. For example, suppose one is planning to build a hotel or a factory; for this consider how much land to use.If the land is cheap, he will use a lot of it; if it is expensive, he will use less and build his house higher.Suppose he calculates the cost of constructing and maintaining two pavements, each with a front porch of 100 feet and 110 feet, so that they will be equally convenient in all respects to him and to his patrons and employees. , and thus equally beneficial to him.Suppose he thinks that the difference between the two schemes, after capitalizing the future outlay, shows that the larger area has an advantage of £500, and if the front porch can be obtained at less than £50 per foot, then he Will would prefer a large area to a small one; fifty pounds would be equal to the marginal value of the land to him.Calculating the added value at the same expense of doing other work on a larger site than on a smaller one, or building on cheaper land instead of less well situated one, he might obtain the same result. .But whichever calculation he uses, it is of the same nature as he decides whether it is worth buying any other business equipment: he takes the net income he can expect from each investment (minus depreciation) if the advantage of the position is that all the land available at that position is available to various employments, where its marginal is expressed in terms of a capital value of £50 per foot of front porch, then it will be equal to the current value of the land. Section V Competition of various buildings for the same land. This supposes that the various occupations of the land will extend the building and premises here and there to that margin where it is no longer advantageous to employ any greater capital on the same ground.As the demand for residential and commercial housing in an area increases, it also pays to buy land at increasingly higher prices to avoid the expense and inconvenience of building additional homes on the same grounds. For example, if the value of land in, say, Leeds rises because of competition for land by shops, warehouses, iron works, etc., a woolen merchant finds that his production costs have increased, and may move to another town or country; The land formerly used was left over for the building of shops and warehouses, to which the city was situated more favorably than to factories.Because he may think that the land cost saved by moving to the countryside and other benefits brought by the move are more than enough to offset the disadvantages.In discussing whether it is worthwhile to do so, the rental value of the foundations of his factory counts towards the production of the woolen goods, and as it should. But we must inquire the truth of the matter, that the general relation of supply and demand pushes production to that margin where the cost of production (not included in any ground rent) is so high that people are willing to pay a high price for more land, in order to avoid Inconvenience and expense due to congestion of work on the ground.These reasons determine the value of the foundation; therefore, the value of the foundation should not be regarded as determining the marginal cost. It can be seen, therefore, that the demands of industry and agriculture for land are in every respect the same.The increase in the cost of oat production is due to the fact that the land which yields a good crop of oats is badly needed for other crops which will afford it a higher rent; likewise the printing-press at sixty feet above the ground may be seen in London at work, If the demands of the land for other uses had not extended the building margins to such heights, the work provided by the printing press would have been a little cheaper.Or a hop-grower may think that, because he pays a high rent, the price of his hops will not cover the cost of production at his place, and he may not grow hops, or find other land to grow it; The land left behind may be leased to a vegetable merchant, and soon the demand for nearby land increases again, so that the total vegetable price received by the vegetable merchant will not be able to cover the production costs of vegetables (including land rent); so he sells it again. , say, to a construction company. In each case, the increasing demand for land changes the profitable margins for intensive use of land.Costs at this margin indicate the role of those fundamental factors that determine land value.At the same time these costs are those to which the general conditions of supply and demand force values ​​to conform; therefore it is correct for our purposes to study them directly; though such a study is quite irrelevant to the purpose of private balance sheets. Section 6. The relationship between the rents of entrepreneurs and the prices they charge. The interesting features of the demand for particularly valuable urban land come more from wholesalers and retailers of all kinds than from manufacturers; and it is worth mentioning here. If two factories in the same branch of enterprise have an equal output, they must occupy almost equal workshop areas.But the size of store buildings and their turnover are not closely related.A lot of space is a convenience for them and a source of extra profit.It is not physically indispensable.But the more space they have, the more stock they can keep on hand, and thus the greater the convenience for displaying samples.This is especially true in those businesses which are governed by changes in taste and style.Merchants in these branches make great efforts in a relatively short period of time to collect fashionable goods of all kinds, especially those that are just about to be in fashion; Dispensable goods, even at a loss.If the location of the store is such that customers are more tempted by selection and less by low prices, merchants will charge prices with fewer turnovers and high profit margins; but if the location is not so, they will charge low prices and try to do as much trade as their capital and establishment; just as in some neighborhoods the greengrocers think it best to pick peas when they are tender, while in others But wait until they are quite full.Whichever plan the merchants adopt, there will be certain conveniences which they doubt are worth offering to the general public; for they expect that the increased sale of commodities by these conveniences will only pay them back, and provide no surplus to rent. .The commodities they sell for these conveniences are those for which the rent of ground does not count in the cost of their promotion, any more than that of the peas which the greengrocer thinks are just worth producing. Some shops, which rent very high, keep their prices low, because many passers-by before them cannot pay high prices to satisfy their tastes.The shopkeeper knew that he must sell it cheaply, or he would not be able to sell it at all.He has to be content with a low rate of profit with each turnover of his capital.But, as the wants of his customers are simple, he need not stock up on large quantities of commodities; his capital can be turned over many times a year, and his annual net profit is therefore large, and he prefers to be in a position from which it can be obtained. And pay high rent.On the contrary, in some quiet streets of London's high society, and in many country villages, the prices are high; for in the former case it is necessary to attract customers with high-end merchants, and the goods can only be sold slowly, In the latter case the total turnover is indeed very small.There is no place where the profit a merchant can make will enable him to pay rents as high as those paid by the merchant in some cheap, well-populated shop in the East End of London. But it is true that if no traffic is added to attract attention, the location becomes more suitable for other uses than for opening of shops; Only the shopkeeper who compares the types) will be able to pay for his burden.Hence, while the demand for shopkeepers of all trades remains the same, there will be fewer shopkeepers; and the remaining shopkeepers will be able to charge a higher price than before, without greater convenience and temptation to customers.Thus, an increase in the value of land in this area would indicate the rarity of the place, and this rarity, other things being equal, would raise the price of retail commodities; just as an increase in agricultural rent in any area would indicate the rarity of the land, which This rarity will raise the marginal cost of production and thus the price of any particular crop. Section 7 Mixed rents of urban real estate.See Appendix VII. House (or other building) rent is a kind of mixed rent, one part of which belongs to the foundation, and the other part belongs to the building itself. The relationship between the two is quite complicated and can be discussed in Appendix VII of this book.But it may be useful to say a few words here about the general nature of mixed rents.At first glance, there seems to be some contradiction in the proposition that one kind of thing produces two rents at the same time; because its rent is in a sense a kind of residual income after deducting operating expenses; There cannot be two surpluses with respect to the same income which comes from it.But if the thing is a composite, its parts may be worked up so that it affords a surplus income which exceeds the cost of running it.Corresponding rents are always theoretically separable, and sometimes they are commercially separable as well. For example, the rent of a flour mill powered by water power consists of two parts, the rent of the land on which it is built, and the rent of the water power it employs.Suppose it is desired to establish a flour mill in a place where there is a limit to the power of water equally available at any one of many foundations.The rent of the hydraulic power together with the chosen ground is then the sum of these two rents; each is the equivalent of differential benefits, one of which is afforded by the occupation of the ground for any production, the other of the hydraulic power. possession arising from the operation of a flour mill on any of these grounds.The two rents, whether or not they are owned by exactly the same person, can be clearly distinguished, and can be calculated separately in theory and in practice. But it's another matter if there is no other foundation on which to build a flour mill. In that case, if the hydraulic power and the foundation are owned by different persons, the difference in their value over the value of the foundation in other occasions, how much of it belongs to the landlord, can only be determined by "agreement" way to solve it. Assuming there are other foundations that can use water power, but with unequal efficiency, it is still not possible to decide how the owners of the foundation and water power divide the producer's surplus, which is the producer's surplus that they jointly provide, more than that used for the foundation. Other occasions and hydraulics are used for the balance of the total remainder provided elsewhere.The mill may not be erected unless an agreement is made for a definite period of time for the supply of water power; but when the time expires, the same difficulty arises as to the division of the total surplus afforded by the water power and the foundations of the mill. Attempts by local monopolies, such as the railroad, gas, water, and electric companies, to increase the price of the customer who has adapted the equipment of his enterprise to avail of their services, and who may have installed expensive equipment at his own expense for this purpose, often result in Similar difficulties.For example, when the manufacturers of Pittsburgh had just erected some blast furnaces which used natural gas instead of coal, the price of gas doubled at once.Mining history also provides many examples of similar difficulties, such as disputes with nearby landowners over rights of way, etc., and with the owners of nearby cottages, railroads and docks.